Sentiment - Neutral Before The European Closing Ramp
The "down in European hours, and surge as soon as Europe is closed" trade is once again so well telegraphed even Mrs. Watanabe is now in it. Sure enough US futures are red as European shares slide for the second consecutive day, with 16 out of 19 sectors down, led by banks, travel and leisure. Spanish and Portuguese bond yields are up. Not much data overnight, except for Chinese Non-manufacturing PMI which rose modestly from massively revised numbers: February adjusted to 57.3 from 48.4; January to 55.7 from 52.9 - and that, BLS, is how you do it. European PPI rose 3.6% Y/Y on estimates of a 3.5% rise, while the employment situation, or rather lack thereof, in Spain gets worse with an 8th consecutive increase in jobless claims, rising by 38,769 to 4.75 million. Bloomberg reports that Spanish home prices are poised to fall the most on record this year, leaving one in four homeowners owing more than their properties are worth, as the government forces banks to sell real-estate holdings. Francois Hollande, France’s Socialist presidential candidate, widened his lead over President Nicolas Sarkozy in voting intentions for the second round of the 2012 election, a BVA poll showed. Italian bank stocks are notably down and today seems set to be the third consecutive day in which we see trading halts in Intesa and Banca Popolare. Few more weeks of this and the financial short-selling ban is coming back with a vengeance. Yet all of this is irrelevant: the bad news will simply mean the global central banks will pump more money, putting even more cracks in the monetary dam wall, and the only question is how long before US stocks decide to front-run the European close, and whether European stocks will rise in sympathy, just because they get to close one more day.
More detailed recap from BofA:
The minutes of the March FOMC meeting will be released this afternoon at 2:00 pm. Market participants interpreted the modest upgrade to the outlook as a sign that the Fed might be poised to back away from its late 2014 rates commitment and priced out the probability of additional QE. But speeches by Chairman Bernanke in the past week, and New York Fed President the week before, maintained and reiterated the dovish bias of the FOMC majority. We will look for the discussion around the outlook and the risks to see whether greater optimism is starting to enter into the staff forecast, which might be seen as foreshadowing an upward revision to the Fed's economic projections at the April FOMC meeting.
Overnight, most Asian equity markets finished higher as they reacted to better data out of China and the US. The MSCI Asia Pacific index rose 0.3% building on yesterday's 0.4% increase. Since the beginning of the year the MSCI index has risen 12%. Looking at the individual markets the Hang Seng posted a 1.3% gain. The next best performer was the Korean Kospi up 1.0%. The Indian Sensex increased 0.7% while het Shanghai Composite was lifted 0.5%. On the flip side, the Japanese Nikkei was the only regional market that we cover that finished lower (-0.6%).
In Europe, equities are selling off. In the aggregate they are down 0.3%. Blue chips are underperforming the regional aggregate down 0.4%. French listed firms are down 0.4% as well while shares listed in London and Germany are off 0.2%. At home, futures are pointing to a weaker opening as well. The S&P 500 is set to open 0.2% lower today reversing some of the 0.8% gain recorded yesterday.
In bondland, US Treasuries are trading flat across the curve. Investors are likely waiting for the FOMC minutes to be released later today before making updates to their probabilities of more QE this year. If our forecast proves correct the Fed will enact QE3 in the third quarter of this year. That should cause a rally in the Treasury market. Currently, the 10-year yield is 2.18%. In Europe, both the UK gilt and German bund are unchanged at 2.21% and 1.81% respectively.
The dollar is trading marginally lower in the currency markets with the DXY index off 0.1%. Commodities are slightly lower as well. WTI crude oil is 69 cents lower at $104.55 a barrel. Gold is trading at $1,675.43 an ounce after falling $2.20.
Overseas data wrap-up
Yesterday Spain reported that its February unemployment rate rose to 23.6%. Our European team expects unemployment to continue rising over the course of this year and also next year, as the economy contracts 1.5% in 2012 and stagnates in 2013. Labour market reforms should help to eventually stop the deterioration in the labour market; however, the return to a normal labour market will take several years as the economy struggles with: (1) finding a new growth model not dependent on housing and construction and (2) the economy deleverages.
The Chinese service sector PMI increased to 58.0 in February up from 57.3. As China's economy develops, it will slowly move away from just being a low cost manufacturing base and become a more service and consumer oriented economy. The solid reading on the country's service sector PMI is an indication that the service sector of China's economy is growing at a healthy clip.
As was widely expected the Reserve Bank of Australia left its benchmark interest rate unchanged at 4.25%. The central bank is in a wait and see mode as they wait to see the impact of weaker than expected growth on the inflation rate. The accompanying statement left the door open for a rate cut at their next meeting if inflation was weaker than expected in the first quarter. The next inflation report is due out on April 24.
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